Dr. Rohr shares Mendocino Coast District Hospital budgeting basics
Dr. Rohr provides MCDH fiscal information exclusively to Mendocino TV viewers
Editorial by Kate Rohr, MD
Mendocino TV coverage of the continuing financial challenges of Mendocino Coast District Hospital has encouraged many local citizens to become better informed and involved. Many, however, find the various financial reports difficult to decipher. The purpose of this and future articles is to provide a layman’s understanding of the accounting utilized and thereby provide better transparency regarding the hospital’s finances.
The basic purpose of corporate accounting is to portray an accurate picture of the financial health of a company. Although there are numerous accounting systems that can be used to accomplish this, CASH BASIS and ACCRUAL BASIS accounting are the two most commonly used methods in American corporations. Although both methods are legally acceptable, they vary significantly in their presentation of the relevant data.
In the CASH BASIS method revenue (income) and expenses are recognized when actual money is received or paid. Your bank account is a simple example of cash accounting. When you make a deposit it becomes an income to the account. When you make a withdrawal, it becomes an expense. In other words revenue (income) is recognized when actual cash is received and expense is recognized when actual cash is paid.
In the ACCRUAL BASIS method the time when revenue (income) and expenses are recognized is very different than the CASH BASIS. Revenue in this case is recognized only when both of two conditions are met: (1) Revenue is earned (2) Revenue is realized or realizable. Condition (1) is met when goods or services are actually provided or delivered. Condition (2) requires a more detailed explanation. The revenue is realized if actual cash is received at the time the goods or services are delivered. The revenue, however, is realizable even it no cash is received but it reasonable to expect that cash will be received in return for the goods or services in the future. A good example of a realizable transaction is when a manufacturer sells a product to a distributor but only receives payment when the distributor sells the product to the customer. Condition (1) is met because the manufacturer delivered the product to the distributor and condition (2) is met because the manufacturer reasonably expects to be paid in the future. The manufacturer therefore recognizes the revenue (income) even though no actual money has been received. This recognition of revenue when no cash transaction has occurred is what is termed an “accrual”. Likewise, recognition of expenses is different than in the CASH system. In this system, expenses are “matched” with the revenue. In other words, an expense related to the product is recognized when the revenue associated with that product is recognized, even if actual cash has not yet been expended. An example of an accrued expense would be if free delivery were included. If the revenue is recognized when the product is placed in inventory that delivery charge is recognized as an expense at the same time.
Each of the accounting methods has their advantages and disadvantages that will be discussed in the next article. The important lesson for this article is that MCDH utilizes the ACCRUAL BASIS for its accounting and therefore the nuances of that system are important to understanding of its finances.
Editor’s Note: Dr. Rohr has generously offered to provide Mendocino TV viewers with a series of articles to help understand the complex MCDH budget, which is critical in the months to come as the hospital plans for the future facility and health care needs of our coastal community.